[This review appeared in the Spring 2010 issue of The
Journal of Social, Political and Economic Studies,
pp. 125-130.]

Book Review

Saving
Capitalism: Keeping America Strong

Pat Choate

Vintage
Books, 2009

Pat
Choate, the author of Dangerous Business:
The Risks of Globalization for America and six
other books, was the vice-presidential candidate in Texas oilman Ross Perot’s 1996 Reform Party bid for
president of the United States. Perot had run
in 1992 with Vice Admiral James Stockdale as his running mate. Observers of American politics will recall
that the Perot candidacies provided an energetically idea-filled criticism of
the policies favored by the two major parties.Its tone was populist in the sense that it
identified with “mainstream America,” rejecting established elites and interests.

The
title of the present book tells us that Choate is by no means anti-capitalist.In common with a good many other commentators
on the current scene, however, he believes that the form of capitalism
practiced within the American economy in recent years has become a grotesque caricature,
far different from the capitalism of the past and from what earlier proponents
of a market economy have supported.Choate
and the other commentators see the recent brand as a perversion formed out of a
mixture of cronyism, corruption, and an “free market ideological absolutism” that
is “akin to a secular religion.” When this sort of economy is blended with a
political system that itself is profoundly corrupted by unprincipled self-aggrandizement
and the constant exchange of favors among big money interests and politicians,
the result, Choate argues, is toxic.He
says “the very concept of public service” has changed when “massive political
contributions and lobbying expenditures… buy access and position in Washington.”The book
discusses this in detail, but one of his many examples is especially telling:
“At one point, the chairman of the Republican National Committee was a
registered agent of the Japanese auto industry, and the chairman of the
Democratic National Committee was a registered foreign agent of the Japanese
electronics industry.”It’s a system, it
seems, where everyone’s soul is for sale.

What
Choate favors is a “capitalism, properly regulated.” Although
he wants a “strong financial sector,” he also wants a reversal of what he sees
as a long-standing U.S. policy that has favored finance over industry: “The
federal government in the latter part of the twentieth century put into place,
step by step, a long-term national industrial policy that privileged the
financial industry over all others, particularly manufacturing.”He tells of the deindustrialization of the United States and the decline in manufacturing employment, and says
that “outsourcing… has devastated America’s middle class.”Leaders have “seemed indifferent to the well-being of the people of the United States.” The result has been an impoverishing policy in
pursuit of current gratifications that has hollowed out the American economy.Choate says that “beginning with the Reagan
administration, our government has increasingly financed its debt by selling
national assets and borrowing money from the central banks of Japan and China, the oil-exporting nations, and Caribbean banking centers….”

He
isn’t pleased as he looks back at the response that has been made to the recent
financial crisis.“The bailout of the
past year has done little more than recapitalized the gamblers and kept our
financial oligarchs in power.”“The
money industry got more than $12 trillion in aid,” while by comparison only a
piddling amount went to other needs.“The priority should be reform first and bailouts second.”Rather than bailouts, there should have been
orderly liquidations such as was done through the Federal Deposit Insurance
Corporation (FDIC) in the savings-and-loan crisis a few years ago.

The
book is certainly a cry of dissatisfaction – but also much more.Choate spells out a number of policies he
thinks desirable in the areas of taxes, innovation, infrastructure, workers’
needs, industrial policy, financial regulation, and trade.

What he
says about taxation ties directly to the points he makes about trade,
industrial policy, the condition of workers, and finance.He favors a Value Added Tax (VAT), which is
used by all industrial countries other than the United States and by 153 countries in all.The VAT is a consumption tax, Choate explains,
that is imposed each time a sale is made, “from raw materials to final sale
with each participant paying the tax only on its value added.” He sees it as having several advantages over
the income tax, which has long been the principal source of revenue for the
national government in the United States.We won’t
recount those advantages here, other than to note how a VAT can address several
critical problems.

Choate argues that “nothing can repair the
economy of the United States or that of the world until U.S. trade is balanced,” citing the enormous trade deficits
over the past several years.In this
connection, it is essential to know that “World Trade Organization (WTO) policy
allows other nations to rebate the VAT, thereby subsidizing their exports sold
in the United
States,
while imposing a tariff-like VAT on U.S. imports into their countries.”This is a potent protectionist system – “a
giant import tariff” – that has long worked against American products.Taken just by itself, it is a reason why
“thousands of American manufacturers are responding… by moving their production
to countries where they too can get the VAT advantage.” This migration lends itself to the
deindustrialization of the United States and to the loss of American jobs.

The United States can move from the income tax to a VAT within the
existing WTO framework, since the VAT is “instantly compatible with WTO
treaties.” The VAT is an “indirect
tax,” the rebating of which is permitted, rather than a “direct tax’ such as the
income tax, the rebating of which is prohibited as a “trade subsidy.”The result of thisdiscrimination against the American system is
to grant other countries a tax loophole (and, in effect, a tariff) , which came
about “in the aftermath of World War II” when the United States was anxious “to
speed Europe’s economic recovery” and that persists to this day.

The U.S. federal budget deficit, Choate argues, is akin to the
trade deficits in that it, too, must be overcome if there is to be economic
recovery.“It is crucial to state that America will be unable to surmount the current economic
crisis until it again controls its debt….”A Value Added Tax is relevant here: “The VAT is the most powerful and
efficient way ever invented to raise government revenue.It is precisely what America needs now.”Increasing
revenue is accompanied by other advantages: it “greatly encourages savings by
not taxing money saved or the interest generated”; it goes far toward
eliminating the massive non-compliance problem experienced under the income
tax; and its regressive burden on people with low incomes can be eliminated by
doing what many countries do: “impose zero or low rates on food, health care,
and religious and cultural services.”

Even
though we will recount several of Choate’s other proposals, readers will be
well served by reading the book for a more complete discussion.Because Saving Capitalism is short at 261
pages, one might expect its content to make it dense; but this is belied by its
easy readability.

His
chapter on “Innovation” provides a short course about how the U.S. patent system relates to America’s unfavorable competitive situation.Patents, he says, are at “the heart of
invention,” but there are serious flaws in the American system.These include having given advantage to
less-innovative large producers in preference to the more prolifically inventive
“small-entity inventors.”The processing
of U.S. patents is underfunded and far too slow.For these and other reasons, there is much to
be improved.

Choate’s
chapter on “Infrastructure” calls for a “national capital budget – a plan to
set priorities, financing, and time schedules.”This is desperately needed because “the United States has significantly
underinvested in its domestic civil works for decades” – in, among other
things, levees, dams, drinking and wastewater treatment, solid waste disposal,
bridges and roads, airports, inland waterways, rail, schools, hazardous waste,
public parks and recreation.

“Restoring
a responsible capitalism,” he says, calls for imposing “strict federal
supervision of all financial institutions of any form doing business in the United States.”He makes
several suggestions about this supervision, but there are reasons to doubt the
wisdom of his admonition that “the United States should first take on the task of putting its house in
order and only then consider various worldwide regulatory proposals.”Why?Because if global reforms aren’t made while the world’s attention is on
the need for them, it is likely that they will fall far short of what is
needed.The reality is that both the
national and the global financial scenes cry out for reform
simultaneously.At the world level, global
financial “brinksmanship,” with hundreds of trillions of dollars sloshing at
great speed, contains recurrent threats of world economic collapse.The dangers are so critical that a
postponement of reform is highly inadvisable. We stress this importance despite knowing that
global reforms will in all likelihood run into insurmountable resistance from
international banks that are often larger than the governments that would seek
to regulate them.Resistence may come,
too, from emerging nations, such as China, that would not welcome outsiders’ control of their
financial systems.If such resistance
prevails, the world economy will continue in peril.

Choate
would play “hard ball” with the malefactors who brought about the current
crisis.Criminal charges, he says,
should be brought against the many who committed fraud.There were various types of fraud in the real
estate mortgage market, and as mortgage loans were collateralized and sold in
the world market “virtually all the participants knew they were involved in a
massive scheme” that featured “collusion by industry insiders.” Choate would impose a “lifetime ban on people
responsible for this crisis” – “those who would automatically qualify are the
CEOs and all board members from every bank, insurance company, and investment
house of that era that failed because of the corporation’s overexposure to
subprime mortgages.”He continues: “Others
who merit the same ban include leadership (CEOs and boards) of all the major
banks that had to take federal bailout monies… because of their subprime mortgage
activities.”This suggests a veritable revolution,
justified because “the ban would tell the world that market capitalism is about
responsibility and that the United States is dead serious….”

He
joins with many other authors today in saying that commercial banking should
again be separated “from brokerage activities.”And short-term speculation should be replaced by long-term
investment.One way to do this is to base
executive compensation on performance over an extended period of time rather
than on quarterly gains.Others would be
to “impose either a transaction tax on each corporate stock trade or a tax on
short-term trades.”

Choate’s many prescriptions seem right to the point,
but need to be weighed seriously against the alternatives.Given the power-alignments that exist in
American politics, it is probable that some of his suggestions, especially such
a thing as banning for life much of the erstwhile financial leadership of the United States, will be dropped into a black hole.But the national dialogue has many voices, and
Choate’s is certainly an important one.

The
book covers so much ground that it may be asking too much to say that in
various ways his analysis and proposals should be taken considerably further.Nevertheless, it is valuable to realize that the
complex economic situation today calls for much more.We notice that Choate’s discussion of
innovation and improvement of the patent system contains no hint of the role
that robotization must play in the reindustrialization of the United States.Non-labor-intensive technology can compete with minimal-cost Third World labor; American workers cannot.

When he
directs his discussion of the condition of American workers to the need for
jobs, he is trapped within what logicians call the present “universe of
discourse”; i.e., he shares (in this connection) a common inability to “think
outside the box.”It is odd that he
doesn’t quite come to a realization that in the future most people won’t be
able to derive their livelihood from employment.He comes close when he says rhetorically that
“one answer is to provide them with more education and training,” and then
asks, “but training for what?”It is understandable that almost everyone
continues to think, as Choate does, in terms of what until now has been
universally necessary – income-through-gainful-employment.But if non-labor-intensive
technology continues to come in, as it almost certainly will (and must), most
of the economic return will go to the owners of the technology.This has, of course, robust implications for
all aspects of economics, politics and society.

There
is little pie-in-the-sky in Choate’s very practical analysis.But we would be remiss if we didn’t comment
at least briefly on his idea that “bringing Mexico, its people’s lives, and its economy up to
developed-world standards is a mission the United States and Canada have delayed too long.”With this simple sentence, he would impose a
nation-building undertaking both vast and quixotic.